Random thoughts of a computer scientist who is working behind the enemy lines; and lately turned into a double agent.

Sunday, July 29, 2012

The disintermediation of the firm: The feature belongs to individuals

My experience with online outsourcing

I joined the Stern Business School, back in 2004. In my first couple of year, my research approach was pretty much a continuation of my PhD years: I was doing a lot of coding and experimentation myself. However, at some point I got tired to writing boring code: Crawlers, front-end websites, and other "non-research" pieces of code were not only uninteresting but were also a huge drain of time.

So, I started experimenting with hiring coders. First locally at NYU. Unfortunately, non-research student coders turned out to be a bad choice. They were not experienced enough to write good code, and were doing this task purely for monetary reasons, not for learning. I got nothing useful out of this. Just expensive pieces of crap code.

In summer of 2005, I started experimenting with online outsourcing. I tried eLance, Guru, and Rent-A-Coder. I tentatively started posting there programming projects that were not interesting conceptually (e.g., "crawl this website and store the data in a CSV file", "grab the CSV data from that website and put them in a database", "create a demo website that does that", etc)

Quickly, I realized that this was a win-win situation: The code was completed quickly, the quality of the websites was much better than what I could prepare myself, and I was free to focus on my research. Once I started getting PhD students, outsourcing non-research coding requirements became a key part of my research approach: PhD time was too valuable to waste on writing crawlers and dealing with HTML parsing peculiarities.

Seven years of outsourcing: Looking back

Seven years have passed since my first outsourcing experiments. I thought it is now a good time to look back and evaluate.

Across all outsourcing sites (excluding Mechanical Turk), I realized that I had posted and hired contractors for a total of 235 projects. Honestly, I was amazed by the number but amortized this is just one project per 10 days, which is reasonably close to my expectations.

Given the reasonably large number of projects, I thought that I may be able to do some basic quantitative analysis to figure out what patterns lead to my own, personal satisfaction with the result. I started coding the results, adding variables that were both personal (how much did I care about the project? how detailed were the specs? how much did I want to spend?) and contractor-specific (past history, country of origin, communication while bidding, etc).

Quickly, even before finished coding, a pattern emerged: All the "exceeded expectations" projects were done by individual contractors or small teams of 2-3 people. All the "disappointments" were with contractors that were employees of a bigger contracting firm.

In retrospect, it is a matter of incentives: The employees do not have the incentive to produce to the maximum of their labor power. In contrast, individuals with their own company, produce much closer to their maximum capacity; the contractor-owners are also are connected to the product of their work, and they are better workers overall.

I would not attribute causality to my observation but rather self-selection: Individuals that are knowledgeable understand that the bigger firm does not have much to offer. In the past, the bigger firm was fulfilling the role of being visible and, therefore, bringing projects; the firm also offers a stable salary but for talented individuals this quickly becomes a stagnating salary.

With the presence of online marketplaces, the need to have a big firm to get jobs started decreasing. Therefore, the talented contractors do not really a bigger firm to bring the work.

The capable individuals disintermediate the firm.

The emergence of the individual

Although the phenomenon is still in its infancy, I expect to see the rise of individuals and the emergence of small teams to be an important trend in the next few years. The bigger firms will feel the increase pressure from agile teams of individuals that can operate faster and get things done quicker. Furthermore, talented individuals, knowing that they can find good job prospects online, they will start putting higher pressure on their employers: Either there is a more equitable share of the surplus, or the value-producing individuals will move into their own ventures.

Marx would have been proud: The value-generating labor is now getting into the position of reaping the value of the generated work. Ironically, this "emancipation" is happening through the introduction of capitalist free markets that connect the planet, and not through a communist revolution.